Prospects and Problems for Burma’s Economic Growth

Political uncertainty, collapsing global oil prices and entrenched infrastructure problems are likely to hamper the country’s prospects for business development in the year ahead.

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By William Boot 5 January 2015

Burma’s business development prospects in 2015 are forecast to be mixed as the country grapples with a variety of problems ranging from domestic political uncertainty to outside economic influences beyond its control.

National elections this year will make some foreign investors hesitant to enter Burma until a clear outcome emerges, say analysts, and the unexpected collapse of oil prices in 2014 is likely to put plans to develop 20 offshore oil and gas blocks into slow gear.

Some major infrastructure investment decisions, notably the special economic zone at Dawei on the southeast coast, are anticipated, but analysts are not holding their breath for a very positive outcome in the near term.

However, some foreign observers believe that continuing economic growth is certain, unless there is a sudden lurch back to full military government control.

Economic reform must be a continuing key issue for Burma’s leadership if the country is to follow its neighbors and integrate further with the international community, said an assessment by Treasury Today a financial affairs magazine based in Britain.

“The next 12 months may well be critical in how [Burma] progresses, with elections and further reform scheduled to take place, and corporates need to be mindful of this,” the magazine said in its latest issue.

However, it also quotes one senior manager in regional finance forecasting the next few years for Burma as a time of “furious change with companies rushing to take advantage of the numerous opportunities the market presents”.

“The key difference between [Burma] and other countries in the region is the compressed time scale that all these changes are happening in and this is unique,” Grant Knuckey, the chief executive of ANZ Banking Group for Cambodia, Laos and Burma told Treasury Today. “It therefore remains very difficult to plot a linear path for the country but it seems that the direction is already set and this has the potential to bring huge benefits to the country, its people, and corporates who enter into it.”

But both Knuckey and Ryan Aherin, senior Asia analyst for Verisk-Maplecroft, believe that major obstacles to economic expansion in Burma in 2015 are the country’s inadequate banking and finance facilities plus rampant corruption at all levels.

“The country’s financial sector remains in an infant state,” Aherin told Treasury Today. “So, while the effects of the foreign bank licences will be beneficial in the long run, in the immediate future challenges will remain.”

This first quarter of 2015 should see the announcement of more final agreements in production sharing contracts (PSCs) between the state-owned Myanma Oil & Gas Enterprise and the foreign oil companies who won licenses to explore 20 sites in the Bay of Bengal and Andaman Sea for oil and gas.

Although the licenses were awarded last March, only one of the 13 foreign firms has so far agreed on a PSC.

Terms for investment and potential profit sharing have been complicated by the collapse of international crude oil prices over the last six months which make new investment less financially viable. Ten of the 20 licensed new Burma blocks are in deep sea areas which make drilling for oil and gas much more expensive.

“Only about one-fifth of the projected production from the 400 largest new and planned oil and gas fields around the world will be profitable if oil prices remain at US$60 or below,” the New York Times said at the end of December, quoting international financial advisers Goldman Sachs.

“If prices stabilize and then bounce back quickly the recent drop might soon be forgotten. But a sizable group of analysts say that rather than experiencing a passing blip, the market is undergoing a lasting adjustment to greater abundance of oil and muted economic demand,” the Times said.

Major oil companies that won offshore licenses for Burma in March include Shell, Chevron, Total and ConocoPhillips.

The national oil companies (NOCs) of neighbors Malaysia and Thailand, which have projects in Burma, have already announced expenditure cuts.

“Following Malaysian NOC Petronas’ announcement that it will cut its capital expenditure by 15% to 20% in 2015, Thai NOC PTT Exploration and Production (PTTEP) has also stated a lower budget for the next five years [which will] see a 10.9% decrease in investment,” Business Monitor International said.

The continued lack of a deep-water port for Rangoon threatens to undermine manufacturing growth in Burma’s biggest city which is also the main commercial sea gateway into the country, another observer said.

“One of the bottlenecks of manufacturing development [in Burma] is the lack of a deep sea port. Unfortunately, [Rangoon] has no deep sea port and the quick development and integration of the country will benefit greatly from such an investment,” said Masato Abe, an economist from the UN’s Economic and Social Commission for Asia and the Pacific (ESCAP).

Abe is critical of plans by the governments of Burma and Thailand to develop a new port at Dawei on the southeast coast as part of a special economic zone (SEZ).

“The Dawei port is located approximately 700 kilometers from [Rangoon],” he said in a study published by the Hong Kong based think tank Fung Global Institute. “Although the Dawei port has a geographic advantage with regard to market access to Thailand, [Burma’s] main trade partner, it is far from the traditional industrial clusters of [Burma].”

Critics of the Dawei SEZ have said it would primarily benefit Thailand by giving it access to the Indian Ocean as an oil transhipment terminal, and to expand its petrochemical industries, which are stymied in the greater Bangkok region by environmental laws.

A Naypyidaw-Bangkok government-level meeting is due to be held in January at which the Thai authorities have indicated that Japan will become a key financial partner in the Dawei SEZ. However, this has been mooted before and to date there have been no firm commitments from any major Japanese companies.